Federal transfers can depend on local fiscal capacity which is measured by local tax bases. The aim of this paper is to understand to what extent and how these transfers affect local tax decisions. We develop a model with two provinces producing one mobile good. The good is taxed according to the destination principle. Final consumers decide to buy the good from the province where it is cheaper. The two provinces engage in tax competition. The introduction of scale economies into the shopping technology generates nonlinear tax reaction functions which make it possible to test the effect of a transfer equalizing local tax bases on tax competition in two complementary tax regimes. Used for this purpose are cigarette and gasoline tax data from Canada. In the case of cigarette tax it is found that nonlinearity in tax competition is almost entirely offset when equalization holds: tax competition in the two tax regimes become closer. The shopping technology for gasoline gives less scope for scale economies, so that equalization does not affect reaction functions.
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number
5373.
Find related papers by JEL classification: H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General H7 - Public Economics - - State and Local Government; Intergovernmental Relations H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies H2 - Public Economics - - Taxation, Subsidies, and Revenue H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Amrita Dhillon & Myrna H. Wooders & Ben Zissimos, 2006.
"Tax Competition Reconsidered,"
Working Papers
0602, Department of Economics, Vanderbilt University.
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